Good news: The Greed of Politicians Is once again Thwarted by the Laffer Curve

Of course not. You would understand that a lot of your patrons would simply dine elsewhere. And if they didn’t have other restaurants available, many of them would simply eat at home.

But now imagine you’re a politicians and you want more tax revenue so you can try to buy more votes and redistribute more money to the special interests that fund your campaign.

Would you assume that doubling a tax rate would lead to twice as much revenue?

Based on the shoddy methodology of the Joint Committee on Taxation (JCT), which is in charge of the revenue-estimating process on Capitol Hill, the answer is yes.

To be fair, the bureaucrats at the JCT probably wouldn’t say that tax revenue would double, but their model basically assumes that tax policy doesn’t affect the economy’s overall performance. So even if there’s a huge increase in the tax burden, they assume overall economic output won’t be affected.

This obviously is an absurd assumption. You don’t have to be a rocket scientist to realize that taxes impact economic performance. Low-tax economies like Hong Kong and Singapore, for instance, routinely outperform medium-tax economies like the United States. Similarly, differences in tax policy are one of the reasons why the United States generally grows faster than (or doesn’t grow as slowly as) Europe’s high-tax welfare states.

The lesson that should be learned is that the JCT should not estimate the revenue impact of a change in tax policy simply by looking at the change in the tax rate and the current trendline for taxable income. To get a more accurate answer, the bureaucrats also should try to estimate the degree to which taxable income will change.

This is the essential insight of the Laffer Curve. You can’t calculate changes in tax revenue simply by looking at changes in tax rates. You also have to consider the resulting changes in taxable income.

So it’s an empirical question whether a shift in a tax rate will cause revenues to change a little or a lot, just as it’s an empirical issue whether revenues will go up or down.

It depends on how sensitive taxpayers are to changes in tax rates. Some types of taxpayers are very responsive, while other aren’t.

Second, you definitely don’t want to be on the revenue-losing side of the Laffer Curve. That means households are losing so much income that politicians actually have less money to spend, a lose-lose scenario.

Politicians, though, often can’t resist the temptation to raise tax burdens all the way to the short-run revenue-maximizing point.

But what’s really amazing is that some of them are so short-sighted and greedy that they raise the tax burden by so much that revenues actually fall.

And that’s what is happening in New York, where the tax burden on cigarettes has become so high that tax revenues are falling. Here are some excerpts from a story in the Syracuse newspaper.

The number of state-taxed cigarette packs sold in New York has plummeted by 54 percent in the past decade. …more smokers are buying cigarettes in ways that avoid New York’s $4.35 per pack tax, the highest in the nation. They cross state lines, shop from black market vendors and travel to Native American outlets to save $6 per pack or more, experts say. New York is losing big. In the past five years, the state’s cigarette tax collections have dropped by about $400 million…off-the-tax-grid shopping options add up to as much as $1.3 billion in uncollected state cigarette taxes each year, according to a study by the National Academies of Sciences, Engineering, and Medicine.

And the article notes that Oklahoma’s non-compliance rate is even higher.

About 35 percent of smokers in Oklahoma buy cigarettes in ways that avoid state taxes, compared with about one-third of smokers in New York who do the same, experts said.

Needless to say, politicians hate it when the sheep don’t willingly line up to be fleeced. So they’re trying to change policy in ways that divert more money into their greedy hands.

That’s the bad news. The good news is that they’re not very successful.

a federal court in 2011 ruled in the state’s favor and paved the way for Gov. Andrew Cuomo to tryto collect the state tax from Native American nationsby making their wholesalers pick up the cost. Instead, many nations abandoned the wholesale route andstopped selling name-brand cigarettes. They beganstocking their stores with significantly cheaper onesmade by Indian-owned manufacturers, experts said, like Seneca-brand cigarettes.

And even when policy changes are “successful,” that doesn’t necessarily translate into more loot that politicians can use to buy votes.

When taxes become extortion, people will evade when they can’t avoid.

…the illegal trade of cigarettes has grown, especially in New York City where smokers are supposed to pay an extra $1.50 per pack on top of the state tax. A recent study by New York University estimatedas many as 15 percent of New York City cigarettessales avoided the state tax.

The Germans call it Schadenfreude when you take pleasure from another person’s misfortune. Normally, I would think people who feel this way have a character flaw.

But not in this case. I confess that get a certain joy from this story because politicians are being punished for their greed. I like the fact that they have less money to waste.

P.P.S. Here’s my as-yet-unheeded Laffer Curve lesson for President Obama, based on the fact that rich taxpayers paid five times as much tax after Reagan reduced the top tax rate from 70 percent to 28 percent.

P.P.P.S. And here’s something that’s downright depressing. Some leftists are so resentful of successful people that they want higher tax rates even if the result is less revenue. And you’ll notice at the 4:20 mark ofthis video that President Obama is one of those people.

P.P.P.P.S. Speaking of leftists, here’s my response when one of them argued against the Laffer Curve.

There is another variant to the laffer curve (LC) – that derives from the fact that the LC has been used to justify tax cuts but spending has not been sufficiently controlled and the result has been – since 1980 anyway- rising debt to GDP ratios –

It is a curve that is similar to the laffer curve except on the “X” axis is the debt to gdp ratio instead of the tax rate – but the shape of the curve is similar –

The logic is simple – as the debt to gdp ratio grows, economic growth and tax revenue is relatively unaffected maybe even increases – but then at some point the ‘tipping point is reached’ and the ‘economic doom loop’ sets in as economic growth slows and in the absence of spending control, the ratio increases still further, revenue falls the ratio increase and the doom loop continues – in fact spirals downward

The research I’ve seen shows the tipping point at about 80 – 100 % for public debt to GDP – we’re ate 80% now – more later on that but if you have any interest in developing this further, there is a Nobel prize in there for someone

Okay, I understand your satisfaction at seeing bureaucrats thwarted, but it’s kind of like, “Hah hah! That mugger killed five people to steal their money … and then it turned out that none of them were carrying any money! That is so funny that he didn’t get anything despite his evil schemes! I laughed and laughed.”

Politicians regularly construct tax laws decide to reward or penalize specific behavior. Like the whole idea of a “carbon tax” is that if you tax pollution, companies will respond by polluting less. But then when they impose taxes on work and investment, they work on the assumption that these taxes will have no effect on the amount that people work and invest. Apparently the reasoning is that if the stated goal of a tax is to discourage actions that the government considers bad in some way, then people will respond by doing it less to avoid the tax. But if the stated goal of a tax is to raise revenue, people will respond by doing it just as much as always. People respond, not just to rewards and punishments, but also to the motives and goals of the legislators when enacting the rewards and punishments. At least that appears to be the theory.

“The lesson that should be learned is that the JCT should not estimate the revenue impact of a change in tax policy simply by looking at the change in the tax rate and the current trendline for taxable income. To get a more accurate answer, the bureaucrats also should try to estimate the degree to which taxable income will change.”

Amen,

I’d add that it is not simply a more accurate answer. In the long term, growth is the only answer that really matters. Growth is the compounding answer that dwarfs all other factors.

Because, while we are busy living our daily lives, in the mid to long term compounding growth becomes the overriding component in everything, including tax revenue. Unlike redistribution, which is a simple factor (mathematically capped to 100%), growth is exponential. When it comes to prosperity, growth dwarfs all other factors in the mid to long term.

Tax Argentinians all you want. You will not be able to squeeze much out of them. After many decades of coercively collectivist low economic growth the raw energy of revenue is meager. A protracted Argentine slower growth rate has compounded Argentina from a once first world nation of hope and promise into the middle-income country group. Argentinians got the bright idea that everyone should be expected (and coerced/”nudged”) to work to serve everyone else, so nobody wanted to work – at least not with enough enthusiasm to outcompete other more motivated jurisdictions. Argentinian prosperity rankings sank. Along the same lines, modestly taxing the Swiss yields far more revenue than heavily taxing the French (or the Italians and Germans for that matter) — and continually diverging even further!

But it’s hard for human voter-lemmings to break out of behavior baked into our genes from tenths of thousands of years of evolution in a near static world. A world of virtually zero growth where people were born and died in the same environment until about three centuries ago. The protracted and irreversible world growth trendline we have experienced in the past three decades is something that humanity never experienced. Ever! Not only that, but trendline analysis shows that world growth is not only continuing but accelerating! Countries not on a 4% growth trendline at this point are on a de-facto deterministic extinction path.

But stuck with the coercive collectivism baked in our genes through our evolutional past, short term immediate redistribution vs long term compounding prosperity is the irresistible blue light drawing the voter-moth to his destruction. Amongst the three hundred million of this country, the voter-lemming will find someone who is not only capable of delivering this coercive collectivism “dream” but also sincerely believes in it. The voter-lemming will ferret these individuals out of the masses and promote them into high political office.

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“It depends on how sensitive taxpayers are to changes in tax rates. Some types of taxpayers are very responsive, while other aren’t.”

More important is how sensitive to tax rates is your country’s worldwide competitiveness, i.e. how sensitive is your worldwide competitiveness to raw motivation to produce.

If your country is 5% more competitive than the rest of the world, you may still dominate the prosperity rankings. But a tax increase of a few percentage points could easily erase that narrow margin, and put your country’s prosperity into the death spiral. I think that is the tipping point we are witnessing today in America. As evidenced by secular slow growth, we have entered the vicious cycle. Voters are genetically programmed to react to the malaise of slower growth with more statist (i.e coercively collectivist) policies. On this path American middle class prosperity status will dwindle fast. At half the aggregate world growth, American growth deficit will quickly compound American middle class standard of living into the middle income country category by the latter part of this century. BTW, way before any of the alleged effects of climate change are felt (*)

(*) And BTW, the effects of climate change will never be felt because a world that is about 50 times (that is 50x) more prosperous than today (yes that is what 4% growth compounded to AD 2100 yields – and that excludes the already evident growth trendline acceleration!) and the mythical technology this future world will have at its disposal, will make quick work out of any climate change, if climate change manifests at all due to other technological changes that will surely happen for sure even without the renewable pork. But the myopic voter-lemmings of today are just as pathetic and clueless as world central planners were in AD 1915. Imagine wworld central planners in 1915 trying to make plans to better our lives today. How many things would they get right? Anything? The greatest destruction of future growth, tens of trillions, did not happen at the JCT, but in Paris last week (no, not at the Bataclan, but in Le Bourget where the eco-totalitarian world government porkfest was held).

– Bad news: The Greed of Politicians Is only stopped by their inability to extract more because they have left so little to support the work of the slaves. –

One politician says off the record: “We are collecting as much tax as we can. Yes, we are collecting less than we could because we have set the rates so high. But, we don’t mind, because it is so much fun and we can always hope.”